Prentiss v. Eisner, 189.

• Decision Date: 16 June 1920
• Docket Number: 189.
• Citation: 267 F. 16
• Parties: PRENTISS v. EISNER, Internal Revenue Collector. [1]
• Court: U.S. Court of Appeals — Second Circuit

267 F. 16

PRENTISS v. EISNER, Internal Revenue Collector. ^[1]

No. 189.

United States Court of Appeals, Second Circuit.

June 16, 1920

Sullivan & Cromwell, of New York City (Eustice Seligman and Philip L Miller, both of New York City, of counsel), for plaintiff in error.

Francis G. Caffey, U.S. Atty., of New York City (Vincent H. Rothwell Sp. Asst. U.S. Atty., of New York City, of counsel), for defendant in error.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

ROGERS Circuit Judge.

This is an action to recover from the defendant the sum of $7,432.88 with interest, which amount the plaintiff alleges she was wrongfully compelled to pay to the defendant as collector of internal revenue. It appears that the plaintiff and her then husband, since deceased, filed with the defendant a joint return of their net income for the year 1913, pursuant to the act of Congress approved October 3, 1913. U.S. St. at L. vol. 38, pt. I, c. 16, Sec. II, p. 166. The aforesaid act of Congress, in paragraph B, p. 167, provided as follows:

'That, subject only to such exemptions and deductions as hereinafter allowed, the net income of a taxable person shall include gains, profits, and income * * * including * * * but not the value of property acquired by gift, bequest, devise, or descent. * * *

'That in computing net income for the purpose of the normal tax there shall be allowed as deductions: * * * Third, all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits.'

And in paragraph D, p. 168, it provided as follows:

'The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calendar year ending December thirty-first: Provided, however, that for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixths only of the specific exemptions and deductions herein provided for.'

It appears, too, that in the year 1913 the plaintiff inherited a portion of her father's estate, and that on the inheritance thus received by her the state of New York assessed against her an inheritance tax of $259,805.71, which amount she paid on December 11, 1913. The plaintiff, in making her income return under the act of Congress, included therein as a deduction five-sixths of the inheritance tax which she had paid to the state of New York, which amounted to $216,504.75. This deduction was not allowed by the Commissioner of Internal Revenue, and he levied and assessed against her an additional tax of $7,287.14.

Thereafter the plaintiff, acting, as she alleges, under duress, paid the additional tax, which with interest, amounted to $7,432.88. Thereupon she instituted this action to recover back the amount so paid. The complaint was demurred to, upon the ground that it did not state facts sufficient to constitute a cause of action. The court below sustained the demurrer, and dismissed the complaint.

The question of law thus presented is whether the payment by the plaintiff of the inheritance tax to the state of New York was a proper deduction from her income tax return for the year 1913. That is the sole question herein involved. The plaintiff's contention is that the inheritance tax which she paid to the state of New York was a tax paid to a state, and therefore under act of Congress the plaintiff was entitled to make the deduction of five-sixths of the amount so paid in making her income return.

The Commissioner of Internal Revenue, in making the ruling to which reference has been made, stated that:

'A collateral inheritance tax levied under the laws of the state of New York, being, as it is, a charge against the corpus of the estate, does not constitute such an item as can be allowed as a deduction in computing income tax liability to either the estate or a beneficiary thereof.'

The District Judge, in sustaining the demurrer, stated that he did not regard the New York Transfer Tax Act 'as imposing a tax upon the plaintiff's right of succession which is deductible in her income tax return. ' The material provisions of the New York Transfer Tax Act (Consol. Laws, c. 60) may be found in the margin. ^[2]

The right to dispose of property by will is statutory. The matter has always been recognized as within the legislative control. In the reign of Henry II (1154-1189) a man's personal property was, at his death, divided into three equal parts, if he died leaving a wife and children; one part went to his wife, another to his children, and only the remaining third could be disposed of by his will. And, at least after the establishment of the feudal system, and prior to the enactment of the statute of wills, 32 Henry VIII, the right to make a will of real estate was not known to the English law.

There has been and still is a difference of opinion among courts as to the exact nature of an inheritance tax. It is generally agreed that such a tax is not upon the property or money bequeathed. The dispute is over the question whether the tax is laid on the privilege of transmitting property or on the privilege of receiving the property so transmitted. The right to transmit and the right to receive are distinct, and each is alike under the legislative control. The distinction between the right to transmit and the right to receive is important, and upon the distinction depends the right to deduct or not to deduct the amount of the tax in the income return submitted to the federal government.

The Circuit Court of Appeals in the Third Circuit has recently decided Lederer v. Northern Trust Co., 262 F. 52. In that case the question arose as to the right to deduct a tax paid under the Collateral Inheritance Tax Act of the state of Pennsylvania. The answer to be given to that question depended upon whether the Pennsylvania tax was an estate tax, the burden of which was imposed upon the estate of a decedent, as claimed by the executors, or was a legacy tax, the burden of which was imposed upon the legatee or beneficiary. It happened that the Supreme Court of Pennsylvania in Jackson v. Myers, 257 Pa. 104, 101 A. 341, L.R.A. 1917F, 821, had squarely decided that the collateral inheritance tax of that state was not levied upon an inheritance or legacy, but upon the estate of the decedent, and had held that what passed to the legatee was simply the portion of the estate remaining after the state had been satisfied by receiving the tax. The Circuit Court of Appeals held that the decision of the Supreme Court of Pennsylvania, construing the inheritance tax law of that state, was binding on the federal courts, and that inasmuch as the tax was held by that court as a tax on the estate, and not a tax on the inheritance, the amount of the tax so paid was properly deductible in computing the net estate under the act of Congress of September 8, 1916. Under a like state of facts we should have no difficulty in reaching a like conclusion. But the case with which we are dealing presents a different question, involving as it does the Tax Law, not of Pennsylvania, but of New York.

In 1900 the Supreme Court in Knowlton v. Moore, 178 U.S. 41, 20 Sup.Ct. 747, 44 L.Ed. 969, had under consideration a tax imposed under the War Revenue Act of June 13, 1898 (30 Stat. 448). The opinion in that case is exhaustive and occupies about 70 pages. It deals with the subject of death duties and sustains the constitutional right of Congress to impose death duties. In the course of the opinion, which was written by Justice (now Chief Justice) White, it was said:

'Thus, looking over the whole field, and considering death duties in the order in which we have reviewed them-- that is, in the Roman and ancient law, in that of modern France, Germany, and other continental countries, in England and those of her colonies where such laws have been enacted, in the legislation of the United States and the several states of the Union-- the following appears: Although different modes of assessing such duties prevail, and although they have different accidental names, such as probate duties, stamp duties, taxes on the transaction, or the act of passing of an estate or a succession, legacy taxes, estate taxes or privilege taxes, nevertheless tax laws of this nature in all countries rest in their essence upon the principle that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested.'

It thus appears as the opinion of the court that in general death duties are imposed on the...